Posts

May 20, 2019

Mad Hedge Technology Letter
May 20, 2019
Fiat Lux

Featured Trade:

(THE BIG PLAY IN CISCO)
(CSCO), (JNPR), (ANET), (INTC), (GOOGL), (AMZN)

The Big Play in Cisco

You can’t steal the mojo from the company that sells network software and infrastructure equipment.

Cisco (CSCO) is effectively an indirect bet on people using the internet because companies need the network infrastructure to offer all the cool and useful services that tech provides.

Technology and the services that result from it continues to be at the heart of customer strategy and now more than ever, Cisco’s market-leading portfolio and differentiated innovation are resonating with them as they transform their IT infrastructure.

Cisco is also a fabulous bet on 5G as the most recent technologies like cloud, AI, IoT, and WiFi 6 among others are developing together to revolutionize the way business operates and delivers new experiences for customers and teams.

Cisco is fundamentally changing the way customers approach their technology infrastructure to address the rising complexity in their IT environments.

They have constructed the only integrated multi-domain intent-based architecture with security at the foundation.

This is designed to allow customers to securely connect their users and devices over any network to any application.

Enterprise networks today must be optimized for agility and heightened security, leveraging cloud and wireless capabilities with the ability to extract insights from the data and security integrated throughout.

Cisco is in pole position to deliver this to customers.

Last quarter saw the launch of new platforms expanding the enterprise networking assets with the launch of subscription-based WiFi 6 access points and Catalyst 9600 campus core switches purpose-built for cloud-scale networking.

By combining automation and analytics software with a broad portfolio of switches, access points, and controllers, Cisco is creating a seamless end-to-end wireless first architecture.

With the newest Catalyst 9000 additions, Cisco has completed the most comprehensive enterprise networking portfolio upgrade in their history.

Cisco rebuilt their entire access portfolio with intent-based networking across wired and wireless.

Cisco also now have one unified operating system and policy management platform to drive simplicity and consistency across networks all enabled by a software subscription model.

In the data center, their strategy is to deliver multi-cloud architectures that bring policy and operational consistency no matter where applications or data resides by extending Application Centric Infrastructure (ACI) and offering HyperFlex to the cloud.

According to Cisco’s official website, its HyperFlex product is “a converged infrastructure system that integrates computing, networking and storage resources to increase efficiency and enable centralized management.”

Cisco’s partnerships with Amazon Web Services (AWS), Google Cloud, and Microsoft Azure are great examples of how they continue to work with web-scale providers to deliver new innovation.

Some new additions are Cisco’s cloud ACI for AWS, a service that allows customers to manage and secure applications running in a private data center or in Amazon Web Services cloud environments.

They also expanded agreements with Alphabet (GOOGL) by announcing support for their multi-cloud platform Anthos to help customers build secure applications everywhere from private data centers to public clouds with greater simplicity.

Going forward, Cisco will integrate this platform with its broad data center portfolio, including HyperFlex, ACI, SD-WAN, and Stealthwatch cloud to deliver the best multi-cloud experience.

Organic growth has surpassed 4% for five straight quarters and expanded margins and positive guidance for the current quarter will reaccelerate PE multiples, increasing as more investors buy into the strong narrative.

CEO of Cisco CEO Chuck Robbins boasted on the call that “we see very minimal impact at this point based on all the great work the teams have done, and it is absolutely baked into our guide going forward” when referring to the headwinds of the global trade war.

It’s been quite the new normal for chip firms to guide down for the rest of 2019, and Intel’s (INTC) worries are emblematic of the growing challenges facing the tech industry.

Cisco bucked the trend by issuing strong forward guidance of 4.5% to 6.5% revenue growth in its fiscal fourth quarter, and earnings of 80 cents to 82 cents per share.

In an in-house survey, Cisco found that 11% of respondents have upgraded networking infrastructure and 16% expect to do so in the next 12 months.

The “minimal impact” of the trade war indicates to investors that even with negative tech sentiment brooding around the world, Cisco’s best in class tech infrastructure still cannot be sacrificed and the migration of companies to digital directly benefits Cisco who provides the building blocks for software and hardware tech companies to develop around.

Cisco even felt bold enough to hike prices giving consternation to current customers.

Both Juniper (JNPR) and Arista (ANET), lower quality network infrastructure companies, have indicated their enterprise businesses are growing faster than the overall market and Cisco’s price hike was probably a bad time to up margins in the current frosty climate.

Even more worrying is data that suggests a general Enterprise pause in spending at a minimum and could entrap the broader tech market as many capital expenditures could be put on hold in the late economic cycle.

Keep in mind that Cisco’s Catalyst 9000 line had an abnormally strong last fourth quarter due to brisk adoption accelerating meaning comps will be hard to beat in the next earnings report.

However, these are minor bumps on the road at a time when the major narrative is running smoothly and shows no signs of stopping.

Cisco shares will continue to rise if they continue to upgrade their products and back it up with their best of breed reputation that could spur more price hikes.

Investors should wait for dips to buy in this name until there are any signs of product quality erosion which I believe will not happen in 2019.

 

 

 

March 13, 2019

Mad Hedge Technology Letter
March 13, 2019
Fiat Lux

Featured Trade:

(NVIDIA STEPS UP ITS GAME),
(NVDA), (INTC), (MSFT), (ANET), (CSCO), (MCHP), (XLNX)

Nvidia Steps Up its Game

Nvidia (NVDA) was right to pull the trigger – that was my first reaction when I first learned that they had aggressively acquired Israeli chip company Mellanox for $6.9 billion.

The fight to seize these assets were fierce triggering a bidding war -American heavyweights Intel and Microsoft were also in the mix but lost out.

CEO of Nvidia Jensen Huang touted the importance of the deal by explaining that “the emergence of AI and data science as well as billions of simultaneous computer users, is fueling skyrocketing demand on the world’s data centers.”

Therefore, satisfying this demand will require holistic architectures that connect massive numbers of fast computing nodes over intelligent networking fabrics to form a giant datacenter-scale compute engine.

Mellanox and its capabilities cover all the bases for Nvidia and will nicely slot into its portfolio offering, an added bonus of cross-selling and upselling opportunities to existing clients.

The strategic motives behind the deal are plentiful with increased importance of connectivity and bandwidth enhancing Nvidia’s ability to provide datacenter-scale computing across the full stack for next-generation high-performance computing and AI workloads.

The agreement is the result of the company’s shift toward next-gen technology as adoption of cloud, AI, and robotics ramps up and Nvidia will be at the forefront of this massive migration.

As the fourth industrial revolution advances, Nvidia is best of breed of semiconductor companies and the imminent adoption of 5G will aid the likes of Microchip Technology (MCHP) and Xilinx (XLNX).

Technology is rapidly changing, and the data center is the segment that is accelerating at a faster clip than in previous years translating into de-emphasizing current revenues of gaming and autonomous on a relative growth basis.

These segments will be secondary to the addressable opportunity in data center and signing up Mellanox is a key strategic initiative to exploit this growth opportunity.

Missing the boat on this compelling opportunity could have dragged Nvidia into an existential crisis down the road as the missed opportunity costs of lucrative data center revenues would begin to bite, and with no quick fix on the horizon, Nvidia’s growth drivers would be potentially disarmed.

Investors need to remember that Nvidia derives half of its revenue from China and up until this point, gaming had been a huge tailwind to its total revenue, however, the Chinese communist party has identified gaming addiction in young adults as a national crisis and have been refusing to deliver new gaming licenses to gaming creators.

As the data center via the cloud begins its next ramp-up of insatiable demand, Nvidia was acutely aware they could not miss the boat and to grab a foot hole against larger player Intel.

Almost overpaying to have more skin in the game does not do justice to what the ramifications would have been if Intel or even Microsoft were able to hijack this deal.

The two-fold victory will in turn boost sales of Nvidia’s data center products long term while depriving Intel of extending the lead in data center.

And after the lack of recent underperformance in the prior quarter, Nvidia needed a gamechanger to cauterize the blood flow.

Nvidia’s total revenue plunged more than 24% YOY in Q4 of 2018, and shareholders have been looking for remedies, especially after the once mythical cryptocurrency business blew up and the company was stuck with a glut of inventory.

The purchase of Mellanox will help Nvidia start competing with other dominant players like Cisco Systems (CSCO) and Arista Networks (ANET).

Mellanox is one of a handful of firms selling hardware that connects devices in the data center through network cards, switches, and cables.

The deal still needs regulatory approval and could be a stumbling block if Chinese authorities drag this into the orbit of the trade war and make it a bullet point in negotiations.

The net result is positive to the overall business model, and this move will breathe oxygen into Nvidia’s long-term narrative with a flow of revenue set to come online once the 5,000 Mellanox employees are integrated into Nvidia’s levers of operation.

Shares should be the recipient of short-term strength and after getting smushed by a poor last quarter, there is substantial room to the upside.

A dip back to $150 would serve as a good entry point to strap on a short-term bullish trade in Nvidia shares.